Unrelated business taxable income

[Guest Patrice Kramm]

A profit sharing trust owns less than 1% of an S corporation. The accountant maintains that the dividends paid by this corporation to the trust are taxable to the trust as unrelated business taxable income. I have never seen this approach taken. Is anyone familiar with this situation?

[mbozek]

I am not familiar with your situation; however IRC 1361©(2)(A) and 1361(d) limit ownership of S corp stock to certain types of trusts. I do know that an IRA cannot be a shareholder of an S corp Rev. Rul 92-73 because it is not an eligible trust.

[jpod]

If the plan is not an ESOP, the accountant is correct. Although any 401(a) plan is a permitted shareholder, the plan's share of the corporation's income for the corporation's year ending with or within the plan year is UBTI, unless the plan is an ESOP.

[jpod]

I'm sorry; the accountant is not 100% correct. It is not the "dividends" which are taxable. The plan's share of the corporation's income is taxable.